The weekend papers were full of reports about the Treasury Department and Federal Reserve Bank meeting behind closed doors with mortgage lenders, servicers and investors to work out a plan for a voluntary freeze in interest rates for some subprime borrowers.
I was fascinated by the stories — the New York Times and Wall Street Journal coverage had significant overlap — and I pored over them to try to divine their murky details. As I read, though, a niggling thought took over my brain: If anyone is getting their rate frozen on their adjustable-rate mortgages, I want mine frozen too.
I’m no doubt opening myself up to charges of heartlessness. I don’t have a an ultralow teaser-rate ARM. My loan isn’t subprime. In fact, I knew exactly what I was doing when I bought an adjustable-rate product. I understood the risks and benefits. I’ll be able to afford the consequences of a rate increase.
Still, why should I be the sap who pays just because the above is true? The Journal’s primer suggests that only borrowers for whom a freeze would make the difference between staying in their home and defaulting would be eligible for a freeze. Those who either can afford their mortgages without a freeze or can’t afford their mortgage under any circumstances wouldn’t qualify. Good luck deciding who doesn’t need the help. I’ve just told you I don’t need it because I’m being honest and I’m not sharing any numbers. Would I like to continue paying the same interest rate for the next five years? Hell yes.
The harm I suffer by this measure is philosophical. The impact on others is clearer. A group called the American Securitization Forum, which represents hedge funds who bought repackaged subprime loans, appears to be resisting the most the “voluntary” freeze proposal because its members stand to lose a lot. (Its investor members are listed here.) A rate freeze would cut into their returns. Who’d be helped? Lenders and servicers who can keep collecting on the mortgages they sold. Shares of Citi (C), Wells Fargo (WFC) and Countrywide (CFC) all shot up Friday.
(Look for more details and debate on this topic Monday, when Treasury Secretary Henry Paulson — who realized there was a mortgage crisis months after his former partners at Goldman Sachs (GS) figured it out — addresses the well-timed Second Annual National Housing Forum hosted by the Office of Thrift Supervision. Paulson is scheduled to speak for 15 minutes, but the day promises plenty of other fireworks. The agenda includes Countrywide CEO Angelo Mozilo, Toll Brothers (TOL) CEO Robert Toll (whom I had fun with in July), Fannie Mae (FNM) CEO Daniel Mudd, and American Banker’s Barbara Rehm, one of the best banking journalists in the country.)
The decision to freeze an interest rate or otherwise modify a mortgage is appropriately handled by the borrowers and the lenders, and, in our current reality, the investors who bought the loans from the lenders. They’re the lenders now. They’ll act in their economic interests, whether that be freezing a rate or forcing a default. Anything else makes a total sham of the system of lending money so a borrower can purchase an asset which, in turn, is pledged as collateral against the loan.
Heartless? Perhaps. I’d feel a whole lot more generous if my own mortgage payments weren’t headed higher.